EU single market membership boosts UK economy by 4%, says IFS

British banks could be hit hard if the country lost access to the European Union single market, as maintaining membership could add an extra 4% to the economy, the Institute of Fiscal Studies said on Wednesday.

Comparing benefits to be a member of the single market as part of the European Economic Area (EEA) and membership of the World Trade Organisation, the think-tank estimated that the benefits of the single market could be worth about 4% of gross domestic product (GDP).

IFS director Paul Johnson told BBC Radio 4’s Today programme that there was a difference between access to and membership of the single market as it is “virtually a meaningless concept”.

"We've heard a lot of people saying of course we'll have access if we leave the single market union. Broadly speaking, yes, we will, as every other country in the world does. You can export into the EU wherever you are from, but there are different sorts of barriers to doing so."

Since the UK voted to leave the EU in the referendum on 23 June, the country is yet to start form talks with the trading bloc about its future relationship and what it means about access to the single market.

IFS research associate and author of the report, Ian Mitchell said: "From an economic point of view we still face some very big choices indeed in terms of our future relationship with the EU.

"Membership is likely to offer significant economic benefits particularly for trade in services. But outside the EU, single market membership also comes at the cost of accepting future regulations designed in the EU without UK input. This may be seriously problematic for some parts of the financial services sector."

Access to the single market particularly impacts the financial sector as banks could lose passporting rights that allow direct access to clients in the EU. The IFS said that financial firms which do a large amount of business with EU companies could move elsewhere.

"Anything short of actually being in the single market would mean that passporting was forgone, and these firms would be likely to need an EU-based subsidiary to service EU customers. Without membership ... the UK would be likely to lose high-value economic activity and jobs."

However, keeping access to the single market by becoming a member of the EEA could come at a cost to the UK as they will no longer be able to shape regulation, merely be a servant of it.

Belonging to the EEA could also require the UK to comply to rules on the free movement of people and contributing about £8bn to the EU budget.

The IFS said the advantage of being a member of the EU was that the single market reduced or removed barriers to trading services, which was far more important that removing tariffs on the trade in goods.

Chancellor Philip Hammond said that because of the Brexit vote the country will leave the EU but must retain access to the single market for the financial services industry.